Publications

Category: Tax

The climate of antagonism experienced between the tax administration and the taxpayer favors the maintenance of a conflict relationship between the two parties. The construction of a new paradigm presupposes reducing the distrust of the taxpayer in relation to the public power, as well as changing the perception of the tax authority in relation to the taxpayer.^[1]

Well known for the high levels of litigation, tax litigation reflects a complex and bureaucratic tax system, which leaves the taxpayer subject to penalties and sanctions.

As an effect of this imbalance, the ineffectiveness of the conflict resolution system is observed, which results in excessive litigation in Brazilian tax system. Statistics pointed, already in 2019, a tax litigation (administrative and judicial, at the three federative levels) that exceeded the level of R$ 5.44 trillion – 75% of national GDP.

The use of preventive measures against tax litigation is an international trend, with emphasis on the use of tax transparency and compliance programs in favor of a less antagonistic relationship based on the paradigms of trust and collaboration. The cooperative tax compliance consists of fulfilling the main tax obligation (payment) through reciprocal cooperation between the state management and the taxpayer.^[2]

The initiative to create a diploma for the protection of the taxpayer has already been adopted in countries such as the United States (Taxpayer Bill of Rights II) and Spain (Ley de Derechos y Garantias de los Contribuyentes), among others.

In early 2022, Brazil received the invitation letter from the Organization for Economic Cooperation and Development (OECD), with unanimous approval by the ambassadors of the 37 countries that make up the group, start the process of adhering to the organisation.

In addition, Brazil is a member of the OECD Forum on Tax Administration (FTA), whose main objective is to improve the performance of the tax administration in order to make it more efficient and effective and increase tax compliance, reducing costs for taxpayers and encouraging a cooperative environment based on mutual trust.

In the analysis of the current national tax system and the data related to the stock of cases in the administrative and judicial spheres, attention is drawn to the search for alternative ways of resolving disputes in tax matters and the establishment of a harmonious relationship between the parties that make up the legal-tax relationship.

It is being processed in the House of Representatives Complementary Bill 17/22 (PLP 17/22), authored by Mr Felipe Rigoni (União Brasil) together with 31 other parliamentarians. He proposes to establish the Taxpayer's Defense Code in Brazilian legislation. The content presents a set of rules, rights and duties to regulate the interaction between taxpayer and Brazilian Federal Revenue (Brazilian IRS) and curb abuses.

The original text of PLP 17/22 is structured in five chapters:

• Preliminary provisions and definitions;
• Fundamental standards;
• The rights of the taxpayer;
• The fences and duties of the Public Treasury; and
• The final provisions.

The Taxpayer's Defense Code opens its text recognizing the asymmetry between taxpayer and Brazilian IRS and provides for fundamental norms, such as the protection of taxpayer's rights, especially contradictory and broad defense, in addition to the presumption of the good faith of the taxpayer in its interaction with the IRS.

Another important point brought by the PLP 17/22 is the indication of the assumptions and fundamentals of fact and law that determine decisions in administrative proceedings, under penalty of invalidity. This provision is established as a principle to be considered by the Brazilian IRS in the trial of cases under its competence, to bring greater legal certainty to the taxpayer in the course of administrative discussions.

In relation to the rights of the taxpayer and the prosecutors who represent him, we highlight the provision for compensation of property and moral damages of acts performed by public servants without strict observance of tax legislation and the impediment of seizure of assets as a coercive means for paying taxes.

PLP 17/22 also deals with old issues, but in wide discussion both in the judiciary and in the tax administration to this day. This is the case of the confiscatory effect of the tax fine, a matter of general repercussion pending trial in the Supreme Court.^[3]

Specifically in article 11, item XVI, the PLP 17/22 expressly provides for the prohibition of the application of confiscatory pecuniary penalty that exceeds the amount of the tax due. The measure is in line with a frequently fought clash in tax litigation involving lawsuits against the IRS, which insists on applying heave-high penalties for infractions, even for those not qualified as simulation, fraud or collusion.

The legal diploma provides for protection of confiscatory acts that reach the taxpayer's assets resulting from the tax authorities' actions, as presented in the justification of the PLP 17/22:

"What is intended in these articles is the delimitation of guidelines for the imposition of taxes on the taxable person, according to the best jurisprudence and tax guidelines. Considering, also, the principles of free initiative and Business Freedom, we emphasize that the existence of judicial or extrajudicial proceedings in the face of taxpayers does not prevent the enjoyment of tax benefits and incentives and participation in bids, understanding that the taxpayer of the tax relationship cannot be deprived of the exercise of economic activity".

In this context, the legislative proposal includes prerogatives that aim to facilitate the taxpayer's access to the tax administration, such as the facilitated entry to the hierarchical superior of the business office where his case is being analyzed; immediate remission of any performance, ensuring the immediate exercise of defense; and appropriate and effective treatment in the division of the company.

The Taxpayer's Defense Code presents procedures that precede the beginning of the tax assessment, such as the prior issuance of notification for the beginning of inspection procedure and the analysis of the taxpayer's defense before the tax assessment.

The proposal also presents changes to end obstacles regularly faced by taxpayers by allowing the enjoyment of tax benefits even with the existence of tax proceedings (administrative or judicial) pending and the novation in case of adhering to tax installments, giving the taxpayer the state of delinquency.

The project provides for other practical measures that benefit the taxpayer, such as the sealing of the taxpayer's qualification as a sympathetic person responsible for mere presumption and the configuration of disregard of legal personality only by court decision.

The text also amends some rules provided for in the National Tax Code, with the reduction of the current limitation period of the tax credit collection action from five to three years. The same limitation period should be considered at the enforceable stage of locating the debtor's assets.

In relation to the Brazilian IRS, the project establishes several fences, including the use of police force in the steps in the taxpayer's establishment, except with judicial authorization. The text also conditions the purpose of criminal proceedings against the taxpayer for the commission of a crime against the tax order and the action of breach of confidentiality at the end of administrative proceedings that prove the taxpayer's tax irregularity.

The proposal brought by PLP 17/22 corroborates the need for change in the traditional form of the IRS, characterized by a limited dialogue with the taxpayer and the adoption of a repressive priority posture.

The tax compliance programs widely adopted in international experience evoke the deepening of the dialogue between tax authorities and taxpayers, increasing legal certainty as voluntary adaptation to tax legislation is promoted and the logic of the dispute is reversed.

In Brazil, states such as São Paulo, with "Nos Conformes"; Ceará, with the "Contribuinte Pai D'Égua"; and Rio Grande do Sul, with "Nos Conformes RS", already present compliance programs to establish an environment of reciprocal cooperation, aimed at guiding and serving taxpayers and stimulating the self-regularization of their tax status.

Measures such as the procedure for prior review of infringement notices are widely used in Spain and recommended by the OECD, demonstrating a reciprocal trust relationship between tax and taxpayer. According to the Administrative Litigation Diagnosis (2022),^[4] some Brazilian states already adopt this same measure as a procedure to ensure greater legal consistency to the self. This is the case of the State of Minas Gerais, which avoids entering the tax litigation of tax requirements without being able to be confirmed by the trial bodies.

In this sense, the research highlights solutions adopted as preventive measures of tax litigation and covers the international experience in cooperative compliance as factors to reduce tax litigation. This shows that the exclusively punitive bias (or threat of imposition of sanction) has not proved sufficient to increase the taxpayers' compliance with current tax rules, causing conflicts that translate into high rates of tax litigation.

The construction of a cooperative tax regulation model should be studied and discussed to direct the state's action. The model should be established through the use of regulatory instruments and tax extrafiscality, as proposed in the international scenario.

The Taxpayer's Defense Code may be a path, even if not the only one, for the promotion of compliance, especially with regard to possible ways of implementing a model more based on collaboration and mutual trust between the tax administration and taxpayers.

PLP 17/22 is in the process awaiting a vote of the plenary of the House of Representatives. There has already been a public hearing to discuss the project. A substitute has been presented to the original text, which awaits approval.

^[1] According to the Diagnosis of Tax Administrative Litigation (2022), perceptions brought by qualitative research, based on the responses of the administration s or their representatives, point to the existence of a mutual mistrust in the relationship between the child and taxpayers. There is, therefore, an opportunity to improve this relationship, to build a more preventive system that resolves conflicts.

^[2] Co-operative compliance: a framework: from enhanced relationship to co-operative compliance. Paris: OECD Publishing, p. 14, 2013

^[3] The theme returned to the agenda of the Supreme Court in February 2022, when it was recognized the general repercussion in Extraordinary Appeal 1,335,293, which will discuss on the merits the possibility of fixing punitive tax fine, unqualified, in an amount greater than 100% of the tax due (Theme 1,195).

^[4] Brazilian Association of Jurimetry (ABJ). Administrative Tax Litigation Diagnostic Seminar. Brasilia, 2022. Fifty-five p.

Category: Real estate

Law 14,405/22 was published in the Official Gazette of the Federal Government, on July 13, 2022, which amended article 1351 of the Civil Code to reduce the quorum required in condominium buildings for approval of a change in the building's or real estate unit's use. The Civil Code provided for the need for unanimous approval of the condominium owners. With this change, the quorum is now two-thirds (2/3) of votes.

Law 14,405/22 was based on the fact that the demand for commercial space has been decreasing over the years, generating, consequently, vacancies in rooms and buildings with this use. The scenario was aggravated by the Covid-19 pandemic, especially with the implementation and maintenance of home offices.

Several condominiums, as well as the municipalities themselves, started to rethink how to occupy these vacant properties, since those with an exclusively commercial use and adequate structure could be reused, by changing their use to mixed or residential use. The need for unanimous approval by all condominium owners, however, considerably hindered the adaptation of these enterprises to the new demands of the market.

The change has a major positive impact on the market. From now on, it is easier to change the use of real estate projects that have already been built, or even to expand them by building new buildings for purposes that are different from what was originally established.

This is the case, for example, with mixed used complexes. Many times this type of enterprise is initially composed of only one building of a commercial, residential, and/or hotel nature, and the developers decide, later on, to expand the enterprise with the construction of other buildings with different purposes. The requirement of unanimous approval by the condominium owners often made this decision difficult or even impossible.

The expectation is that the innovation brought by the law represents, in addition to an advance and dynamism to the sector, an incentive for revitalization practices (retrofit) and even for expansion of real estate projects.

Category: M&A and private equity

Clarissa Freitas, Rafael Costa Silva and Georgia Schneider

The board of the Brazilian Securities and Exchange Commission (CVM) reviewed, in June, a proposal for a consent order presented by a director of Investor Relations (DRI). The administrative sanctions proceeding (PAS) dealt with the untimely disclosure of a material fact in the context of a renegotiation of the terms and conditions of a proposed corporate merger, involving the company and its controlling shareholder. The disclosure of the relevant fact only occurred after publication on an Internet news portal.

The board of the agency followed a favorable recommendation of the Consent Order Committee or execution of the settlement, with the payment, in a single installment, of R$ 400 thousand to the CVM.

The investigation was initiated by a notice sent by the company's independent director to the Company Relations Bureau (SEP), reporting that the company's management had received a letter from a reference shareholder informing them of:

• its intention to vote against the merger of a company at a General Meeting of Shareholders; and
• the existence of negotiations between said reference shareholder and the company's controlling shareholders to adjust the corporate merger proposal.

There was a six-day interval between receipt of the letter sent by the reference shareholder and disclosure of the material fact, during which time the intention to vote against and renegotiation of the terms of the merger were published on an Internet news portal.

When questioned by the Corporate Relations Bureau, the Investor Relations director emphasized:

• that disclosure of the contents of the letter would go against the company's corporate interest;
• the information was within the control of the parties and was an ongoing negotiation, and it was doubtful to address it as a relevant fact at that time;
• that according to experts consulted, there was not yet reason for disclosure;
• absence of an order for disclosure from the CVM led it to the understanding that it was not necessary to take the information public at that exact moment; and
• after the news story, the necessary measures were taken immediately.

In drafting the indictment, the Company Relations Bureau highlighted, among other arguments:

• the failure to immediately disclose the contents of the letter compromises those who participated in transactions in the market during this period, by putting the company's shareholders into a position of information asymmetry, which therefore violates the principle of full and fair disclosure;
• the claim of secrecy of all or part of the information cannot is not fitting in view of the indications of leakage, much less in cases where the information was not under the company's control;
• the negotiation between the reference shareholder and the controlling shareholder resulted in conditions quite different from those initially disclosed to the market for the corporate merger;
• it would not be possible to keep control over the information, whose origin was external to the company; and
• the advice of the director of Investor Relations to outside consultants and/or other officers does not exempt or mitigate liability.

Initially, the defendant presented a proposal to assume a monetary obligation in the amount of R$ 250 thousand to extinguish the administrative sanctions proceeding, alleging, briefly, that:

• He acted in accordance with its fiduciary duties as the company's director of Investor Relations;
• the disclosure of an existing negotiation between the controlling shareholders and a reference shareholder could generate speculation in the market;
• the topic had been discussed with experts in the field who advised him not to disclose material facts at that time; and
• in the period between the sending of the letter and disclosure of the material fact, there was no swing in the company's share price.

In reviewing the proposal, the Consent Order Committee considered the following issues to conclude that the monetary obligation in the proposal should be improved:

• the opportunity and convenience of entering into the settlement, as well as the nature and seriousness of the violations subject to the PAS, the prior history of the proponent, its good faith cooperation, and the effective possibility of punishment;
• conduct performed after the entry into force of Law 13,506/17, which provides for a PAS in the sphere of the Central Bank of Brazil and the CVM, establishing new parameters for penalties and negotiation of monetary obligations;
• the company's status among issuers of securities and its degree of shareholding dispersion;
• the track record of the proponent, who had never been charged by the CVM in previous a PAS;
• the possible classification in group II of annex 63 of the RCVM 45, assuming as maximum penalty R$ 600 thousand; and
• CVM precedents in the review of similar cases.

After pondering the above elements, the recommendation was to improve the monetary obligation proposal to R$ 400 thousand, to be paid in a single installment. The proponent accepted the new terms of the proposal, which led the CVM board to follow the recommendation of the Consent Order Committee and decide, unanimously, to enter into the consent order.

Category: Banking, insurance and finance

The Bureau of Private Insurance (Susep) has put up for public consultation a draft of the Resolution of the National Board of Private Insurance (CNSP) that governs the operations of assignment and acceptance of reinsurance and retrocession operations and their brokerage, coinsurance, operations in foreign currency, and insurance contracts abroad.

The draft consolidates several regulations that deal with these topics, modernizes the provisions, and makes them compatible with the regulations recently issued by CNSP and SUSEP.

According to the explanatory memorandum, the drafting process was accompanied by discussions with representatives of the regulated market. Also taken into consideration were international references on the subject, and the recommendations of the International Association of Insurance Supervisors (IAIS).

The big news concerns the change in the global assignment limit rule. This rule provides for that insurers and local reinsurers may not assign in reinsurance and retrocession more than 50% of the premiums written for the risks they have underwritten, considering the totality of their operations, in each calendar year. Some classes are not taken into consideration for the calculation of the limit (for example, performance bonds, rural insurance, and credit insurance).

The draft regulation proposes the following relaxation:

• for insurers, extinguishment of the global assignment limit; and
• for local reinsurers, enlargement of the percentage for retrocession assignments up to 70% of the premiums written (without exception per line of business).

On the other hand, the text requires that insurers present a technical justification, by March 31 of the subsequent calendar year, for the adoption of a reinsurance assignment percentage higher than 90%, considering the totality of their operations, per calendar year. According to Susep, this rule is a precautionary measure, also adopted by other reference jurisdictions, to monitor and curb distortions in the use of reinsurance.

Susep also clarified that maintenance of a limit for local reinsurers is justified, insofar as it is in the nature of their operation to retain high risks. In addition, as a rule, these players do not need retrocession to make business possible, unlike insurance companies. In the general context, their portfolios are suited to the current operational limit (which is 50%).

In parallel, the draft regulation inserts a principle command, providing that insurers and local reinsurers adequately manage their reinsurance and retrocession operations, through the development and implementation of a risk transfer policy (which will complement the risk management policy provided for in CNSP Resolution 416/21).

The draft regulation establishes the minimum guidelines that must included in the policies for retention and assignment of risks in reinsurance and retrocession. The deadline for insurers and local reinsurers to prepare their risk transfer policies will be 180 days from the resolution's entry into force.

The new commands, according to Susep, establish a less prescriptive approach, based on the business strategy of the regulated companies themselves, with an emphasis on the structuring of reinsurance programs.

The measures will especially benefit companies that operate in high-risk lines of business that involve large sums insured and demand intensive use of reinsurance. Companies entering certain lines of business will also benefit, because the support and expertise of the reinsurer is usually fundamental in this scenario to make the operation viable.

The draft also ceases to make reference to the percentage of the preferential offer of reinsurance assignment to local reinsurers, instead referring to the applicable legislation (today, 40%, according to article 11, subsection II, of Complementary Law 126/07). The text is prepared for possible legislative change (studies of which are underway, as reported by Insurance Europe - see Country fact sheet of June 2022).

Public Consultation 9/22 will be open until August 18, 2022, and suggestions may be received via the e-mail address This email address is being protected from spambots. You need JavaScript enabled to view it., accompanied by a specific standardized table for comments or proposals, available on Susep's website.

Category: Litigation

One of the great points of discussion in the case law when a new law comes into effect is the moment at which the new legislation should be applied to legal relationships of continuous treatment or, as in the case we analyze here, in the hundreds of thousands of ongoing lawsuits, as occurred when the Code of Civil Procedure of 2015 (CPC/15) entered into effect.

The temperature of the debates rises if the matter involves one of the most effective measures for the recovery of credits litigated in the Judiciary: piercing of the corporate veil.

In a recent decision handed down by Justice Nancy Andrighi in the judgment of Special Appeal 1.954.015 PE, the Superior Court of Appeals (STJ) upheld a court decision handed down when the Code of Civil Procedure of 1973 (CPC/73) was in force, which provided for inverse piercing of the corporate veil when it is possible to seize the assets of companies of which the debtors are partners. The parties affected by the decision were subpoenaed after the new Civil Code went into effect.

The decision under appeal was made in the record of an action for enforcement of judgment, arising from a judgment issued in an action for damages, in which, after finding irregular succession between the judgment debtor companies, the court decided, without summoning the parties, for reverse piercing of the corporate veil to reach the assets of a legal entity different from the judgment debtor company, composed of the same partners, who were also respondents in the action for execution.

In the special appeal, the appellant argued that there was violation of articles 133 et seq. of the Code of Civil Procedure of 2015, which provide for the ancillary proceeding for piercing of the corporate veil. With this, he hoped to have the nullity of the procedural acts carried out in compliance with the decision, which had been issued in 2014, still in effect under the Code of Civil Procedure of 1973.

In the current law, contrary to the provisions of the previous code, a specific procedure is mandated, in which the judge must summon the parties to respond to the request to pierce the corporate veil, directly or inversely, in order to later decide on the inclusion of the new agents as defendants in the proceeding.

The dispute, therefore, touches on intertemporal law and the procedural requirements to grant piercing of the corporate veil.

The Code of Civil Procedure of 2015 came into effect on March 18, 2016,^[1] and, in its article 1,046, provided as follows: "Upon the entry into force of this Code, its provisions shall immediately apply to pending cases, and Law No. 5,869, of January 11, 1973, shall be repealed." The expression “outright" leaves no doubt that the procedural rule listed in the Code of Civil Procedure has immediate application to ongoing proceedings.

Despite the legislator's intention to apply the new law immediately to pending cases, we must remember that the process is composed of a succession of acts that occur at different times. Therefore, each procedural act must be evaluated separately to determine which law governs it.

This is the core of the so-called Theory of Isolated Procedural Acts, established in article 14 of the Code of Civil Procedure of 2015 and described in the tempus regit actum principle. The new law only affects procedural acts to be performed after it enters into effect, respecting the effectiveness of those already performed.

With the new procedural law in effect, the case law is questioning, based on the Theory of Isolated Procedural Acts and the tempus regit actum principle, which procedures should follow the Code of Civil Procedure of 1973 and which should be converted to the current Code of Civil Procedure of 2015. Or rather, is it possible to speak of retroactivity of procedural acts performed during the transition of codes?

With this in mind, the STJ has drafted a series of administrative rulings (E. Adm.) of the Code of Civil Procedure of 2015 to guide the legal community on the issue of intertemporal law regarding the application of the rules of the two codes in several specific situations.

These are the rulings and their central themes:

• Adm. 2: Admissibility requirements for appeals based on the CPC/73
• Adm. 3: Admissibility requirements for Appeals based on the CPC/15
• Adm. 4: Procedural act performed after the CPC/15 entered into effect
• Adm. 5: Appeals based on the CPC/73 and the opening of the term provided for in the CPC/15
• Adm. 6: Appeals based on the CPC/15 and the opening of the term for formal defects
• Adm. 7: Appeal and fees for loss on appeal under the CPC/15

Despite the STJ's efforts to define parameters, the issue is far from being exhausted.

To contextualize the decision rendered by the STJ in the case under discussion, it is interesting to analyze the concept of piercing of the corporate veil.

In substantive law, piercing of the corporate veil is provided for in article 50 of the Civil Code of 2002. It established, in a list of examples, the casers that would justify its application, particularly in cases where the individualization between the civil existence of the partner and the company is lost, due to abusive and fraudulent actions, with the aim of protecting the assets of one (partner) or the other (company) from their creditors.

As well outlined in the grounds of the appellate decision under analysis, “piercing of the corporate veil has as a parameter, therefore, illegitimate action of the company through abuse of rights, performed through violation of the law or of the articles of association, and also through mixing of assets.

Once the requirements of article 50 of the Civil Code are met, two forms of application of piercing of the corporate veil can be recognized.

The first of these is piercing of the corporate veil itself, which occurs when, to satisfy creditors, the assets of the partners are affected. The second is inverse piercing of the corporate veil, in which, to satisfy creditors, the assets of the legal entity are affected, which occurred in the judgment under discussion.

Although the concept of piercing of the corporate veil has been in force since the Civil Code of 2002 was published, the Code of Civil Procedure of 1973 did not provide a specific procedure for its implementation.

The application of the concept was based on case law. In general terms, if the requirements are found to be met in summary review, the judge can “pierce the veil" of legal entity, overcome asset autonomy and authorize, in an incidental manner, that a certain act of expropriation affect the partner's or the company's assets, depending on whether it is a case of piercing of the corporate veil or inverse piercing.

In this context, the possibility of a defense for those whose assets were affected by piercing of the corporate veil was postponed, that is, only after the act of expropriation could those affected submit their defense.

This is exactly what happened in this case. In fact, in the situation at hand, both companies in which the "succession" was found, besides having the same partners, who were already defendants in the execution of judgment, had the same lawyers as representatives in the record.

Despite these "coincidences", no appeal was filed against the decision that recognized the irregular succession of the judgment debtor companies. This contributed, in the understanding of the STJ, to upholding the decision under appeal, and even recognized preclusion of the possibility of arguing the nullity of the procedural acts performed.

The justice writing for the court, in her grounds for the decision, found that there is nothing to be said of modifying the decision, either due to the inertia of the appellant in the decision that included it as a defendant in the cause, or due to the temporal situation of the law to be applied to the act that so decided. It did not suffice, on the part of the judgment debtor company, to claim that the publication of the decision rendered in 2014 occurred in 2019, in order to make use of the new law that would benefit it.

The STJ followed its settled understanding that the new procedural law will not retroact to acts already completed, which occurred under the old law, even if the proceeding follows its course after the enactment of a new law, which ensures greater legal certainty to acts already performed, even with the enactment of a new law to the contrary.

More than that, the court has signaled that, even if minimum parameters have been defined to guide the decision as to which law is applicable to the case, when elements of intertemporal law are present, other procedural elements, such as preclusion of the matter in question and the effects of the decision handed down by the state courts, will be taken into consideration on a case-by-case basis when deciding these issues.

^[1] As per Administrative Restatement 1 of the STJ

Category: Restructuring and insolvency

Exit financing is a type of financing granted to companies under an in-court reorganization or out-of-court reorganization proceeding, with the specific purpose of paying off the credits restructured by the reorganization plan and financing the debtor's operations after the process is over.

This type of financing is different from DIP financing (Debtor in Possession Financing) structures, which are usually granted throughout the reorganization proceeding and are intended to finance the debtor until a reorganization plan is approved or even during the implementation of such plan.

Exit financing is generally granted after the plan has been approved to enable payment of the competition creditors, closing of the proceeding, and reinsertion of the company in the market under normal competitive conditions.

Although DIP financing structures are already widespread in judicial reorganization proceedings in Brazil, exit financing is still little used. Both were inspired by US practice related to Chapter 11 of the US Bankruptcy Code.

The use of this instrument in judicial reorganization proceedings in Brazil is interesting inasmuch as the Company Reorganization and Bankruptcy Law (LRF) provides that, even after approval of the reorganization plan, the debtor should be kept under judicial reorganization until all the obligations set forth in the plan due up to two years after the granting of judicial reorganization have been fulfilled.

During this period, the company shall be kept under judicial reorganization, under the supervision of the trustee and the judge himself, and must comply with all the formalities provided for in the LRF, in addition to suffering all the limitations and difficulties intrinsic to a company whose name says "under judicial reorganization".

It is no news that companies under judicial reorganization find it more difficult to obtain credit in the financial market and to negotiate contracts with customers and suppliers, who are often unwilling to take the risk of contracting with companies in such a situation.

Thus, obtaining exit financing for the payment of the claims restructured by the plan allows for a faster and more efficient end to the judicial reorganization proceeding and reinsert the company in the market under normal competitive conditions, which facilitates access to credit lines and financing under better conditions.

The recent changes made to the LRF by Law 14,112/20 with respect to debtor financing during judicial reorganization, which includes a whole new section dedicated to the topic,^[1] certainly contribute to providing greater legal certainty to the lender and, therefore, to an increase in the use of different financing modalities in judicial reorganization proceedings.

One of the main changes that help reinforce the legal security of the investor is the new article 69-B. It expressly states that, even if an appeal is filed against the decision that authorized contracting of the financing and the decision is reversed, it is not possible to change the extra-business nature or the guarantees granted by the debtor to the lender in good faith, if the funds have already been released.

Thus, once the granting of financing and the granting of the guarantees have been authorized, it is not necessary to await the final and unappealable decision in order to disburse the funds, since there is legal protection against ineffectiveness of the priority and the guarantees granted.

In the same vein, article 69-D states that in the case of bankruptcy of the debtor before the funds are fully released, the contract is automatically terminated and the lender will not be obliged to disburse the remaining amount. The sole paragraph of the same article reinforces the preservation of the preferences and guarantees granted up to the limit of the amounts delivered to the debtor before the date of the decision that converts the judicial reorganization into bankruptcy.

Also in the case of a bankruptcy, the reform of the law gave more priority to the payment of the amounts disbursed by the lender in the judicial reorganization. It is second only to the expenses indispensable for administration of the bankruptcy and to labor claims of a strictly salary nature due within the three months preceding the bankruptcy decree, up to the limit of five minimum wages per worker.^[2]

Article 69-C also introduced the possibility for the judge to authorize the creation of a subordinated guarantee of one or more assets of the debtor in favor of the lender, dispensing with the consent of the holder of the original guarantee

This provision does not apply, however, to guarantees of fiduciary sale and fiduciary assignment. Thus, even the creation of a guarantee under a condition precedent on the same assets already encumbered must observe the restrictions and any need to obtain the consent of the original creditors provided in the respective debt and guarantee instruments.

Challenges for the application of exit financing

Although the LRF reform has brought about some advantages that make greater use of exit financing feasible in judicial reorganization proceedings in Brazil, we believe that some challenges still have to be faced in the cases to come. Since exit financing is granted at the end of the reorganization proceeding (or as a measure to terminate it), most likely the debtor's obligation to repay the financing will occur after the reorganization is terminated.

In the event of default, the creditor will have the legal and contractual remedies provided, which usually include the possibility of executing of the guarantees and filing for bankruptcy. It is not clear from the legal provisions whether the priority of financing granted in the context of a judicial reorganization already terminated would extend in the event of a new petition for judicial reorganization or a supervening decree of bankruptcy.

That is, would exit financing, in a new judicial reorganization or bankruptcy, maintain its bankruptcy-exempt nature or, since it is a previously existing claim, would it be considered an unsecured claim?

The answer to this question is not clear and, in our opinion, will still depend on the evolution of this concept and on court decisions that address the issue. In our view, the purpose of the law in giving preference to the DIP lender to receive its claim is precisely to stimulate the credit market for companies under judicial reorganization, ensuring greater legal security as to the non-concurrence of credit and priority of receipt in any event.

However, article 69-D deals specifically with cases of converting judicial reorganizations into bankruptcy, and is silent as to the decree of bankruptcy after termination of the judicial reorganization.

Likewise, there is no legal provision regarding the debtor entering into a new judicial reorganization process without the financing granted during the reorganization having been fully paid off. It is also unclear whether such claims would have an bankruptcy-exempt nature simply because they were granted under the prior judicial reorganization.

In practice, investors and lenders of companies under judicial reorganization will probably continue to demand the granting of fiduciary sale and assignment guarantees over the debtor's assets as collateral for their financing, in order to reinforce the bankruptcy-exempt nature of their claims in any bankruptcy or new reorganization process.^[3]

In our view, the greater legal security afforded to the good faith lender, especially against the declaration of ineffectiveness and nullity of the constituted guarantees, will tend to foster the credit market for companies under judicial reorganization in Brazil.

^[1] Section IV-A - Debtor and Debtor Group Financing during Judicial Reorganization

^[2] As per the new wording of article 84 of the LRF.

^[3] According to article 49, paragraph 3, of the LRF, claims secured by fiduciary sale and fiduciary assignment of real or personal property are not subject to the effects of judicial reorganization. In bankruptcy, on the other hand, article 85 of the LRF grants the fiduciary creditor the right to request restitution of the asset sold or fiduciarily assigned, and restitution in cash is also applicable, should the asset no longer exist at the time of restitution, in which case such amounts will have a bankruptcy-exempt nature, pursuant to article 84, I-C, of the LRF.